(1)
Bonds
Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.
Straight-line amortization bond
To Determine: The price of the bonds for Incorporation UF as on 1st January 2018.
(1)
Explanation of Solution
Calculation of price of the bonds for the Incorporation UF as on 1st January 2018 as shown below:
Therefore, price of the bonds for the Incorporation UF as on 1st January 2018 is $129,352,725.
Working notes:
Calculation of present value of interest payments of Incorporation UF as shown below:
Particulars | Amount ($) |
Interest payments amount (a) | $7,500,000 |
PV factor at an annual market rate of 6% for 20 periods (b) | |
Present value of interest payments
|
$103,236,225 |
Table (1)
Note: The Present value of an ordinary annuity of $1 for 30 periods at 6% is 13.76483 (refer Table 4 in Appendix).
Hence, present value of interest payment of Incorporation UF is $103,236,225.
Calculation of present value of principal of Incorporation UF as shown below:
Particulars | Amount ($) |
Face |
$150,000,000 |
PV factor at an annual market rate of 6% for 20 periods (b) | |
Present value of face value of the bonds
|
$26,116,500 |
Table (2)
Note: The present value of $1 for 20 periods at 6% is 0.17411 (refer Table 2 in Appendix).
Hence, present value of principal amount of Incorporation UF is $26,116,500.
Calculation of the amount of interest payment as shown below:
Hence, the interest payment amount is $7,500,000.
The price of the bond is calculated by adding present value of principal and present value of interest payments. Therefore, price of the bonds for Incorporation UF is $103,236,
(2)
To Prepare: The
(2)
Explanation of Solution
Record the journal entry to issuance of the bonds for Incorporation UF as son 1st January 2018 as shown below:
Record the journal entry for issuance of bonds on January 1, 2016:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
|
2016 | Cash | 129,352,725 | ||
January | 1 | |||
Discount on Bonds Payable | 20,647,275 | |||
Bonds Payable | 150,000,000 | |||
(To record the issue of bonds for Incorporation UF) |
Table (3)
Working note:
Calculation of the discount on bonds payable as shown below:
Hence, discount on bonds payable amount is $20,647,275.
- Cash is an asset and it increases by $129,352,725. Therefore, debit cash account by $129,352,725.
- Discount on bonds payable is a contra liability and it decreases by $20,647,275. Therefore, debit discount on bonds payable account by $20,647,275.
- Bonds payable is a long-term liability and it increases by $150,000,000. Therefore, credit bonds payable account by $150,000,000.
(3)
To Prepare: The journal entry to record interest expenses as on June 30, 2018.
(3)
Explanation of Solution
Record the journal entry for payment of semiannual interest and amortization of discount on bonds issued on June 30, 2018:
Date | Account Title and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2018 | Interest Expense | 8,188,243 | |||||
June | 30 | Discount on Bonds Payable | 688,243 | ||||
Cash | 7,500,000 | ||||||
(To record payment of semi-annual interest expenses) |
Table (4)
Working notes:
Determine the amount of amortization of bond discount as shown below:
Hence, the discount amortization of bond amount is $688,243.
Calculation of the amount of interest as on June 30, 2018 as shown below:
Hence, interest payable (cash paid) amount is $7,500,000.
Calculation of the interest expense on the bond as on June 30, 2018 as shown below:.
Hence, interest expenses amount is $8,188,243.
- Interest Expense is a component of
stockholders’ equity , and decreased it. Therefore, debit interest expense account by $8,188,243. - Discount on bonds payable is a contra liability and it increases by $688,243. Therefore, credit discount on bonds payable account by $688,243.
- Cash is an asset and it decreases by $7,500,000. Therefore, credit cash account by $7,500,000.
(4)
To Prepare: The journal entry to record interest expense on December 31, 2025.
(4)
Explanation of Solution
Record the journal entry for payment of semiannual interest and amortization of discount on bonds issued on December 31, 2025:
Date | Account Title and Explanation | Debit ($) | Credit ($) | |||
2025 | Interest Expense | 8,188,243 | ||||
December | 31 | Discount on Bonds Payable | 688,243 | |||
Cash | 7,500,000 | |||||
(To record payment of semi-annual interest) |
Table (5)
Working notes:
Determine the amount of amortization of bond discount as shown below:
Hence, amortization of discount on bond amount is $688,243.
Calculation of the amount of interest as on December 31, 2025 as shown below:
Calculation of the interest expense on the bond as on December 31, 2025 as shown below:
Hence, interest expense amount is $8,188,243.
- Interest Expense is an expense and it decreases the value of equity. Therefore, debit interest expense account by $8,188,243.
- Discount on bonds payable is a contra liability and it increases by $688,243. Therefore, credit discount on bonds payable account by $688,243.
- Cash is an asset and it decreases by $7,500,000. Therefore, credit cash account by $7,500,000
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Chapter 14 Solutions
Loose Leaf Intermediate Accounting
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